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@@ -40,30 +40,6 @@ SM on new user experience (2023): https://fosstodon.org/@simonmic/11012092250155
See [[Organising files]].
### How should I choose account names ?
See [[Choosing accounts]].
### Where are debits and credits ? Why are some balances negative ?
Many plain text accounting tools use negative and positive numbers in place of the traditional *credit* and *debit* terminology.
Of course the credits and debits are still there; in this system, whenever you see a negative amount being posted in an account, it is a credit, and when you see a positive amount posted, it is a debit.
This is just a different surface presentation, which most newcomers find more intuitive and easier to learn.
Because of this, PTA tools often show liability, equity, and revenue account balances as negative numbers.
So eg when a liability becomes larger (more debt!), the balance becomes a larger negative number (more negative).
Similarly, when equity or revenues increase, their numbers get more negative.
You'll get used to reading these kind of reports in a day or two.
Some PTA tools also give the option of flipping these negative signs, or showing traditional credit and debit terminology.
More discussion:
- [reddit: Is there any plain text accounting software which uses standard debits and credits?](https://www.reddit.com/r/plaintextaccounting/comments/18sbmsx/is_there_any_plain_text_accounting_software_which/)
- [hledger FAQ: Why are my revenue (income), liability, and equity balances negative ?](https://hledger.org/faq.html#why-are-my-revenue-income-liability-and-equity-balances-negative-)
## General usage
### How big is your ledger/journal file ?
For individual accounting, somewhere between 500-1500 transactions and 100-400 Kb of journal file per year seems typical.
@@ -71,5 +47,105 @@ For individual accounting, somewhere between 500-1500 transactions and 100-400 K
- https://www.reddit.com/r/plaintextaccounting/comments/ay8ec0/limits_on_ledger_cli_file_size/ (2019)
- https://www.reddit.com/r/plaintextaccounting/comments/dbjizl/how_big_is_your_ledgerjournal_file/ (2019)
## Accounting situations
### How should I choose account names ?
See [[Choosing accounts]].
### Why are some balances negative ?
See [[#where-are-debits-and-credits|Where are debits and credits ?]]
## Accounting
### What are the three top level accounts ?
In english, they are **Assets** (things you own), **Liabilities** (things you owe), **Equity** (your/owners' investment or stake or "overall wealth").
### What are the five top level accounts ?
In practice, two more top level accounts are used, making five.
In english: **Assets**, **Liabilities**, **Equity**, **Revenues** (or **Income**), **Expenses**.
Sometimes abbreviated to single letters; hledger uses A, L, E, R, X.
Revenues and Expenses are essentially inflows and outflows during some period;
technically they are changes in Equity, reported separately for clarity.
Businesses usually merge Revenues and Expenses into their Equity balance at the end of each accounting period.
More: [hledger: Accounting Basics](https://hledger.org/accounting.html#debits-and-credits)
### What is the accounting equation ?
It is a simple formula that always holds true when bookkeeping is correct.
You'll see it written in different ways, eg:
**Equity = Assets - Liabilities**
**Assets + Liabilities + Equity = 0** (using PTA's sign convention)
**Equity = Assets - Liabilities**
**Assets = Liabilities + Equity + Revenue − Expenses**
[Wikipedia](https://en.wikipedia.org/wiki/Accounting_equation),
[Investopedia](https://www.investopedia.com/terms/a/accounting-equation.asp)
### In english, should I call it Revenue or Income ?
"Revenue" is more often used in business, and more precise;
it implies "gross income", ie total proceeds before taxes and certain costs,
whereas "Income" implies "net income", ie profit after taxes and costs.
Eg the report showing profit is called "Income Statement" in the US.
"Income" is very commonly used in personal finance and more familiar to non-accountants.
So, use the one you prefer.
### What is Equity really ?
Equity is more abstract than the other top level accounts, can be described in different ways, and takes a bit longer to feel intuitive.
It is best understood with repeated exposure.
Two useful rules of thumb:
- Equity represents "ownership" in business or "wealth" in personal finance.
- If something doesn't belong to the other four top level accounts, it's equity.
When multiple owners/investors have contributed funding to set up a business, each of them owns a portion of the business, which is tracked as equity.
And if the business is dissolved, they would each have their share returned to them (ideally).
In personal accounting, your finances are "the business" and you are the only investor.
When you start tracking your finances, whatever wealth you have accumulated up to this point is your initial "contribution to the business", ie your equity, which funds your starting balances.
Practically speaking, in personal accounting you'll never use equity except
- when setting up starting balances in a new file
- when converting between currencies (optional, if you want to be [really correct](https://hledger.org/dev/hledger.html#equity-conversion-postings))
### Where are debits and credits ? Why do some balances look negative ?
Many plain text accounting tools use **signed numbers** in place of the traditional terms **debit** and **credit**.
Of course the credits and debits are still there; in this system, whenever you see a negative amount being posted in an account, it is a credit, and when you see a positive amount posted, it is a debit.
Newcomers to accounting find this much more intuitive and easier to learn. (Some experienced accountants find otherwise.)
As a result of this convention, PTA apps and examples often show equity, liability, and revenue account balances as negative numbers.
You can get used to reading these signed-number reports in a day or two.
Just remember this to avoid a common confusion:
- When equity increases (more wealth!) or liability increases (more debt!) or revenue increases (more income!),
their balance is shown as a larger negative number (more negative).
Some PTA tools allow flipping the minus signs, or showing traditional debit and credit terminology instead of signed numbers.
More discussion:
- [reddit: Is there any plain text accounting software which uses standard debits and credits?](https://www.reddit.com/r/plaintextaccounting/comments/18sbmsx/is_there_any_plain_text_accounting_software_which/)
- [hledger FAQ: Why are my revenue (income), liability, and equity balances negative ?](https://hledger.org/faq.html#why-are-my-revenue-income-liability-and-equity-balances-negative-)
- [Hacker News: Double-entry bookkeeping as a directed graph](https://news.ycombinator.com/item?id=39988993)
### Which kind of account are loans ?
If you are the lender, in your ledger it's an asset. Eg assets:loans:PERSON or assets:receivable:BORROWER.
If you are the borrower, in your ledger it's a liability. Eg liabilities:debts:PERSON or liabilities:payable:LENDER.
If the loan is terminated without being fully repaid, eg by being forgiven, the remaining amount due becomes an expense or revenue.
More: [[Borrowing and Lending]]